The Benefits of Trading Options on Stocks, ETFs, and Indexes.
In the grand scheme of things, the Option is the overall best vehicle to help wealth builders achieve their goals and manage market risk along the way. The versatility inherent in the structure of options makes them the perfect tool to help create wealth building scenarios that greatly enhance performance without exposing one’s wealth to any significant risk. In fact, options were originally made to manage risk. By the way:
Managing risk is the number one way to achieve the “Holy Grail” of trading – Consistency — which leads to Compounding, which leads to Exponential Growth.
The key ingredient in an Option is Leverage. There are a lot of moving parts to an option, which I’ll get into next in Understanding Options, but, for the moment, know that the basic advantage of an option is its risk to reward component along with greatly reduced capital outlay to produce the same result as owning the underlying security.
LEVERAGE EXAMPLE (Hypothetical)
This illustration shows the Return on Investment (ROI) between buying the underlying security and buying options at twice the volume (100 shares vs. 2 Contracts – controlling 200 shares) on an Index (QQQ) and a stock (CSCO), both with low volatility (below 25%). Notice that the capital requirement to own the options is 8% or less of the amount necessary to buy the security outright, and the gain is marginally greater for the option trade.
When you buy an Option, your total risk is limited to the amount paid for the Option; so, along with the lower capital requirement, you have much greater protection in the event of an unexpected adverse move.
According to industry experts, from a trading and wealth building plan perspective, traders using Options have a success rate three to four times that of Futures or Forex traders. Intraday trading of Futures, especially the E-Minis, and Forex can offer great results for those experienced enough to make it work, and, after a rather steep learning curve, top traders can be very successful, but the overall success rate for those in the early stages of development favor the Options traders.
Done correctly, Options offer the best opportunity for wealth building success and insuring against market risk – so you never lose money.
That brings up the need for expert instruction and guidance in learning how to use Options. After all, Options are just that, options to buy or sell something else; so, your basic education has to begin with learning how to trade Stocks, ETFs, and Indexes and then learning how to apply Options in the right way to capitalize on and protect against the fluctuations in the market.
The best way to get the education you need and start creating your Wealth Building Plan is to begin by getting a basic overview of Options by studying Understanding Options and then learning how to start your plan to grow a better life by reading Education – The Path to Independent Wealth Management. Let The Diversified Trader guide you through the steps you’ll need to make that goal a reality.
With low initial capital requirements, great leverage, and being able to structure trades in any market condition with limited risk, Options become the Vehicle of choice to help pave your road to becoming that diversified, self-directed wealth builder.
To Having Options,
Your Research & Development Coordinator